Introduction

In the world economy, 1992 was a difficult year. The decline of the United States economy took longer because of the large federal budget deficit and the high rate of unemployment. Although a rapid expansion seemed to have started in the second half of the year, the relatively low exchange rate of the dollar in the international currency markets slowed sales of imported goods.

In Japan, the second largest trading country, prices in the stock and real estate markets decreased rapidly, and the future prospects appeared to be quite gloomy as compared to the recent past.

Although western Europe had placed high expectations on the common market in 1992, unemployment increased in many countries. In Germany the situation was aggravated by the problems of reunification. Late in the year, the European Monetary System (EMS) experienced a serious crisis, when several important countries decided to leave the agreed upon exchange rate system.

At the same time, disintegration of the trading system of the former USSR (FSU) and the countries under its influence (the so-called socialist countries) continued. Many large enterprises that were purposefully isolated from market forces and world prices were unable to compete under free market conditions. Factories specializing in producing goods for the Soviet war machine became completely redundant. However, it was difficult to let them go bankrupt.

The economic and political situation in Russia and the Ukraine had unfavourable impact on the Baltic States which exported more than half of their gross domestic product, mainly to the East. Although the export of goods to these countries continued also last year, it was extremely difficult to agree on prices and to obtain payments.

Many central banks of the republics of the FSU acted quite irresponsibly, continuing to provide subsidized credits to all enterprises and organizations. This forced Latvia to separate itself from the so-called ruble zone.

In May 1992, when Latvia put into circulation its own monetary unit - the Latvian ruble, many financial experts predicted disastrous consequences. However, purchasing power of the Latvian ruble soon surpassed the value of the Russian ruble, and by the end of the year the exchange rate of the Latvian ruble stabilized against the so-called hard currencies.

The monetary policy of the Bank of Latvia received a favorable response from the International Monetary Fund as well as from many experts in Latvia and abroad. The transition to the Lats, the national monetary unit, will take place in 1993 [1].

It is very important to note that the transition period has been difficult for the population. These hardships would have been endured in vain, if Latvia were not able to maintain a stable currency. Devaluation of currency may bring short-lived popularity to the politicians; however, the Bank of Latvia rigorously rejected such monetary policy in 1992.

[1] A gradual introduction of the Latvian national currency - the Lats (in plural - Lati) - will be begun in March 1993.